Villages government plays waiting game in IRS dispute over bonds

The Village Center Community Development District is feeling trapped in its fight with the Internal Revenue Service over whether bonds it issued should be considered tax-exempt.

A recent preliminary ruling by the IRS says that the district isn't a legitimate "political subdivision" under tax codes, which means $364 million worth of recreational revenue bonds it issued between 1998 and 2003 can't be tax-exempt. If the ruling were to become final, the value of the bonds would drop and buyers would be liable for taxes, which would open the district to years' worth of lawsuits.

In the dispute, the IRS is the prosecutor, the judge and, now, the appeals court, said Perry Israel, lawyer for the district.

"You can understand that doesn't seem to be very fair. It doesn't feel like you're living in America," Israel said in an interview from his California office last week.

So, the district is looking for a way to get the dispute out of the clutches of the IRS and into tax court, where it might have a chance of getting a judge to see things differently.

One route is to request something called a "reviewable private letter ruling," Israel said. The process involves asking the IRS chief counsel for a decision. If it's unfavorable — and the IRS already has indicated it would be — then the matter could possibly move to tax court.

Still, because the IRS' conclusion is only tentative, the district hasn't decided what to do, Israel said.

Other options include settling with bond holders who would owe the IRS taxes and would be left holding bonds worth only a fraction of what they paid. The district also could go through an IRS procedure in which the agency enters into an agreement with the district in exchange for terms to be negotiated, and in return the IRS agrees not to tax the holders of the bonds.

Just to mix things up, the holders of the bonds also have the option of taking the IRS into tax court.

None of these solutions is quick. Or cheap.

This all started in January 2008, when an IRS agent began reviewing the bonds issued by the community development district.

The Villages has at least a dozen community development districts, which are perfectly legal. Only two, however, have issued the recreational revenue bonds that are under scrutiny — the Village Center district and the Sumter Landing district.

The district governments can do almost anything that a city or county can, short of operating their own police departments and approving their own growth plans. They can issue bonds, and the Village Center district has sold $426.2 million of them, including the $364 million currently under scrutiny.

Bonds in the typical special districts are issued to buy infrastructure, such as sewer plants, for example. Then, the district is turned over to residents as the homes are bought, and the board operates in the best interest of the community.

In The Villages, however, two of the districts continue to be controlled by the developer and have bought not only infrastructure but "blue sky" purchases that benefited the developer and left residents saddled with millions in debt. Much of the money went ot buy the right to collect amenity fees.

The National Association of Bond Lawyers jumped into the fray on the side of the district with a letter warning the IRS that its decision would have far-reaching effects on the bond market. Really? Even though this particular district operates like no other? That hardly seems likely.

For now, Israel said, there is nothing that the district can do to fight the battle further. James Polfer, chief counsel for the IRS' tax-exempt bonds division, is considering new information that the district submitted Nov. 1.

So, the waiting game is playing out.

"The issuer doesn't have any of the rights that you do as a taxpayer," Israel said. "Right now, we just wait to see what he decides."

Lritchie@tribune.com Her blog is online at http://www.orlandosentinel.com/laurenonlake Lauren invites you to join her on Facebook at http://www.facebook.com/laurenonlake